Fear The Talking Fed! US Treasury And MBS Returns Get Hammered As Fed Signals Monetary Tightening (Mortgage Rate Rises And 10Y-2Y Yield Curve Flattens To 8.8 Basis Points)

The Federal Reserve is making up for Bernanke and Yellen’s “too slow to remove” Fed stimulus policies (QE1 – QE3) and Powell’s Covid-related QE4. Now The Fed is trying to remove the stimulus in a (misguided) attempt to cool inflation. Remember, the dramatic rise in prices was caused by more than Fed stimulypto, it was also caused by Biden’s executive orders driving up oil, gasoline and natural gas prices and the massive Federal spending bills signed by Biden.

The result of The Fed’s jawboning about undoing Fed stimulypto is take away the punch bowl. But the results are troubling. Both the total return indices for US Treasuries and Agency Mortgage-backed Securities (MBS) have declined dramatically since inflation has been rising (highest in 40 years) and The Fed is expected to crank their target rate by February 2023 to 3.448% (The Fed Funds Target Rate currently stands at 1%). That is almost a 250 basis point rise in the target rate in 8 months.

While the 10-year rate is rising rapidly, the 2-year Treasury yield is REALLY rising fast.

And the yield curve (10Y-2Y) is down to +8.819 basis points as The Fed signals tightening.

And with rising 10 and 2Y Treasury yields, we are seeing the fastest rise in mortgage rates since 1981.

Alarm! Nasty Inflation Report Leads To No-bid For MBS (Duration Risk Has Extended To 7 From <1 On August 2, 2021 With Rising Inflation)

Alarm!

The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)

Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.

As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.

Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.

Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.

Weekend Update! US Gasoline Tops $5 (Highest In History), 2Y Treasury Yields Soaring, Mortgage Rates Highest Since 2008 (Inflation Tax Costing Households $5,200 More YoY)

Up, up and away in our inflationary balloon!

Regular gasoline prices have breached the $5 a gallon barrier, the highest in recorded history. And it is even worse in states like California where regular gas prices have been above $7 per gallon.

Bankrate’s 30-year mortgage rate is now 5.78%, the highest since 2008. And rising really fast as The Fed tightens the monetary noose.

Speaking of noose tightening, the 2-year US Treasury Note yield is rising awfully fast.

The US Treasury 10Y-2Y curve slope just flattened to 8.819 bps and challenging the 0% grade awfully fast.

The US Dollar is soaring as US inflation soars, consumer purchasing power (green line) collapses along with M2 Money Velocity.

There is little doubt that soaring inflation, gasoline and food prices have hurt Biden’s popularity as well as the Democrats popularity ahead of the upcoming mid-year elections. People for the most part vote with their wallets.

According to estimates by Bloomberg Economics, US households will spend $5,200 more this year than they did last year on the same consumption basket.

That breaks down to $433 extra in expenditures every single month. That is what is called “the inflation tax.” And it hurts.

Call this The Inflation Tax Blues.

Fed Data Shows a Half Century of Moderate Growth in the Fed’s Balance Sheet Through Two World Wars – Then a Seismic Explosion Under Bernanke, Yellen and Powell (Mortgage Rates Rise To Highest Since June 2009)

Wall Street on Parade had an excellent article showing the seismic explosion in the Fed’s Balance Sheet after the housing bubble burst and ensuing financial crisis.

Here is my version of their chart since 2000 where you can seen the seismic shift in the balance sheet (toxic green slime line), particularly with The Fed’s response to Covid. The Fed is signaling a tightening in monetary policy to help reduce inflation (blue line).

But notice that M2 Money Velocity (GDP/M2) is now near the all-time low along with consumer purchasing power.

How BIG is The Fed’s balance sheet? Try more that a third of size of US GDP.

And as The Fed signals its inflation-fighting intentions, mortgage rates have shot up to 5.51%, the highest mortgage rate since June 2009.

Here is a video of the seismic shift in The Fed Balance Sheet, now that they are allegedly tightening monetary policy.

Speaking of seismic shifts, the Atlanta Fed’s Q2 GDP tracker just fell to +0.9%.

The Fed’s noose is tightening on the economy.

The Fed’s Missouri Boat Ride! Housing Acquisition Index Rises 114.5% Under Biden As Housing Price Reductions Rise 70% YoY (House Price Growth Will Freeze)

I call this The Federal Reserve’s Missouri Boat Ride.

Meaning that The Fed has kept monetary stimulus in play for too long since late 2008 helping to lower mortgage rates from over 6% in November 2008 to 2.98% in November 2021. Then came “The Missouri Boat Ride” as The Fed signaled monetary tightening, leading to mortgage rates skyrocketing to their highest level since 2010.

The result of rising home prices AND mortgage rates? Housing acquisition prices (home prices * 30 year mortgage rates) have skyrocketed.

Between rising home prices and rising mortgage rates, we see that number of prices reductions increasing at nearly 70% YoY (chart courtesy of WolfStreet.com).

Of course, Congress and the media will never ask Janet Yellen (former Fed Chair [2013-2018] and current Treasury Secretary) WHY she kept massive monetary stimulus around for so long. Or why current Fed chair Powell did the same with Covid-related monetary stimulus.

Time to buy gold and silver??

Home Price Cost Index SOARS 114.5% Under Biden As Mortgage Rates AND Home Prices SOAR (Labor Market OVERHEATED As REAL Wage Rate Declines)

Instead of President Ronald Reagan saying ““Mr. Gorbachev, tear down this wall” we need someone to tell President Biden and Federal Reserve Jerome Powell to “Stop driving up prices and making housing unaffordable.” Unfortunately, The Fed thinks that raising interest rates will temper price increases — it won’t. But it could tamper home price growth.

So what we are left with is soaring home prices AND soaring mortgage rates, leaving this scary chart. The housing cost index has risen 114.5% under Biden.

Its only going to get worse from here.

Today’s jobs report for May showed that the U-3 unemployment rate remained the same as April, 3.60%. However, that is lower than the NATURAL rate of unemployment of 4.445% indicating that the labor market is overheated. Historically, The Fed has tightened monetary policy by raising rates when this has happened. So, look for The Fed to keep raising rates.

As I have mentioned before, REAL hourly wage growth is negative since March 2021, just after Biden signed his executive orders canceling drilling on Federal lands and cancelling the Keystone Pipeline. Later, he canceled off-shore drilling permits and Alaska drilling. Now we have REAL average hourly wages declining at -2.8% YoY as The Fed has been reducing M2 Money supply YoY.

Listings of homes is up 11% YoY, the highest in several years.

Let’s see how the housing market does with soaring mortgage rates.

How do you spell stagflation? M-O-N-E-Y … tightening.

The Federal Reserve Board of Governors playing “Hurting housing two times.”

Simply Unaffordable! Real Home Price Growth At 12% YoY, Real Wage Growth At -1.864% (Inflation Making Americans Suffer As Mortgage Rates Rise FAST)

Simply unaffordable!

President Biden met with Federal Reserve Chairman Powell to discuss how to control the inflation that is crushing the middle class and low-wage workers.

Here is a good example of why Biden is worried. There is a mid-term election on the horizon and people are angry and scared. Housing, generally the largest asset owned (or rented) by a household is simply unaffordable thanks, in part, to the over-stimulation of the economy by 1) The Federal Reserve in terms of money printing and 2) the Federal government in terms of fiscal stimulus in response to the Covid outbreak in March 2020.

In nominal terms, the gap between US home prices (Case-Shiller National Home Price Index YoY – US Average Hourly Earnings YoY) is near the all-time high.

Yes, home price growth exploded upwards when The Fed rapidly expanded their balance sheet in response to the Covid outbreak … and only now are considering shrinking the balance sheet.

In terms of house prices, CoreLogic has a nice chart depicted the odds of home prices dropping over the coming year. I circled Columbus Ohio because that is where I am moving (knock on wood).

And then we have the 30-year mortgage rate rising with The Fed’s expected tightening of monetary policy. That will certainly make housing even less affordable, unless house price growth cools dramatically.

You might as well face it, we’re addicted to gov.

Doctor, doctor (Yellen), we’ve got a bad case of UNAFFORDABLE HOUSING.

Step! 2-year Treasury Yield Rises +10.5 Basis Points On Fed Tightening, 10Y-2Y Yield Curve Flattens

Another 10 basis point jumps in Treasury yields, this time at the 2-year Treasury Note.

The 10Y-2Y Treasury slope just flattened to +26 BPS.

Another step in rising mortgage rates!

Washington DC is anything but Harmony Hall.

Heartaches By The Number! Under Biden, Mortgage Refi Applications Down -82.4%, Purchase Applications Down -7.5% And Mortgage Rates Up+80.7% (Fed FINALLY Begins Removing Stimulus!)

Heartaches By The Number … for American households and mortgage lenders as The Federal Reserve begins FINALLY removing monetary stimulus.

Mortgage applications decreased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 27, 2022.

The Refinance Index decreased 5 percent from the previous week and was 75 percent lower than the same week one year ago.

The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 14 percent lower than the same week one year ago.

Under Biden, mortgage refi applications are down -82.4%, purchase applications are down -7.5% and mortgage rates are up +80.7%.

Then we have this headline: “Fed Starts Experiment of Letting $8.9 Trillion Portfolio Shrink”

The Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities — until September. Those thresholds will then double to a combined $95 billion. That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.

As expectation of Fed rate hikes increase, mortgage rates have soared like Tom Cruise’s Super Hornet aircraft from Top Gun: Maverick climbing over the steep mountain.

And mortgage rates are up a bit today.

Meanwhile, The Federal Reserve begins shrinking their balance sheet for the first time since Yellen and company started shrinking it under Trump.

Case Study: How The Fed’s Overstimulus Is Driving Columbus Ohio’s Home Prices To The Moon! (18.6% In Q1 2022 Versus 6.15% In Q4 2019 Pre-Covid)

Earlier today, we saw that the Case-Shiller National home price index in March rose to its fastest rate in history.

Columbus Ohio is not covered by Case-Shiller in their 20-city index, but the FHFA’s home price index does. And in Q1 2022, home prices grew at a 18.6% YoY clip.

Before Covid and the march of The Federal Reserve (and Biden’s anti-fossil fuel orders), home prices in Columbus Ohio were only growing at a 6.15% YoY rate. So, thanks to The Fed, home prices in Columbus are growing at nearly 3 times the pre-Covid rate.

Here is the CS national home price index.

Let’s see how Columbus home prices do with US Treasury yields starting to rise 10+ bps again.